The Gilts Thread

[Panda]

Panda,

The game at the moment is seeking positive real yield. Doesn't matter what inflation is, just make sure that you're earning above it.

Nice post, thankyou.

[ParticleMan]

The game at the moment is seeking positive real yield. Doesn't matter what inflation is, just make sure that you're earning above it.

And that there is the problem.

The losses that you should be making are showing up in widening risk spreads instead.

So either you're hedging the risk (and so you're going down with the rest of us anyway), or you're accumulating a monsterously-sized binary bet.

I hope it's not the latter.

Edited May 11, 2009 by ParticleMan

[shedfish]

keepy uppy time... i know this is about US Treasuries but probably pertinent - Denninger on Market Ticker

Simply put when you prop up prices beyond where they should be everyone who owns that thing will sell into you. The paradox is that this selling then causes prices to fall, not rise - that is, your intended move not only doesn't happen the reverse of the intended move does!

This happened with Fannie and Freddie (Paulson's infamous "Bazooka") and now it is happening in the credit market with Treasury Debt.

If Bernanke does not back off he will find himself in a tightening monetary flat spin. As he comes to own more and more of the public float of the long end the impact of each sale into his program by private holders is magnified in the market.

That is, if there is $1 trillion of something outstanding and you buy $100 billion of it (10% of the float) the impact is X. If there is now $900 billion outstanding (after the first operation) and you buy another $100 billion you have in fact sucked up about 11%. When you get to owning $500 billion another $100 billion sucks up 20% of the float. Each tender operation of the same size thus creates an ever-increasing impact on the underlying price, and since nobody in their right mind will continue to hold something they believe is overvalued, the spiral will tighten precipitously, forcing even more purchases until The Fed owns it all.

At or before that point the long end becomes unavailable to Treasury as a funding source. Forcing all the issue to the short end now starts to ramp short yields (supply and demand, remember - add massive supply and what happens to price?) and Bernanke will then be urged to buy down the time line.

This path leads to a singularity - and both monetary and political failure. The bad news is that the event horizon is far before Bernanke actually winds up owning the entire float, but nobody knows exactly where it is.

Yet once crossed, there is no escape from the outcome.

[200p]

QE is just a side show.

---

The fact of the matter is the base rate is low.

Bonds have been in a bull market for 27 years - what are the odds of that to continue?

Edited May 11, 2009 by trev

[Bazman]

Don't want to go too much off topic but here's another interesting theory, PPT about to crash the stock markets in order to get money back into the "safe haven" of US treasuries, call me crazy but nowadays any "crackpot" theory seems possible.

http://www.marketoracle.co.uk/Article10554.html

Who knows ????

Sorry to be so stupid but what does PPT stand for?

[dapperdave]

Plunge Protection Team?

[Bazman]

Panda,

I try not to make too many forecasts about the future. Unlike many I simply don't feel certain about what's coming, and as I said earlier in the thread, I look at things as a balance of probabilities and adjust my portfolio over time. For the past four years my concern has been preservation of capital (in real terms) rather than seeking high returns, and so I'm still very defensive at present.

As far as QE is concerned, I think it's quite likely that the BoE won't reverse the process (i.e. sell the gilts back into the market). If they did so then that would create a problem because it would suck the reserves out of the banking system, and that could result in a huge weight of gilts being unloaded at the same time, both from the BoE and the commercial banks. Mervyn King hinted in his testimony at the recent Commons Treasury Committee hearings that it may not be necessary to unwind QE as some are expecting.

However, if inflation begins to take off then they'll have to so something, and that's likely to be raising of interest rates. So I think we could see base rates rising quite quickly at some point if the inflation genie is let out of the bottle. Your guess is as good as mine whether we're going to see a surge in inflation. It likely depends on whether the QE injections are leveraged by the banks sufficiently to offset the decline in broad money through loan write-offs and other declines in credit through repayments.

I'm not going to express an opinion on currencies. Again, I haven't got a crystal ball, and let's not kid ourselves that the UK is the only country indulging in such expansionary monetary measures (although our debt position is worse than most). I've tried to hedge by having exposure to a number of currencies through equities and bonds. I also own some gold and silver too, though nothing like the levels that others have advocated. My aim is to have a relatively neutral portfolio so that gains and losses are offset. When asset prices are falling globally, if you can simply hold on to what you've got then your purchasing power is increasing daily. Remember that wealth is relative.

The game at the moment is seeking positive real yield. Doesn't matter what inflation is, just make sure that you're earning above it.

Hey Free trader,

Given current situation do you think inflation of stagflation is more likely?

[FreeTrader]

Hey Free trader,

Given current situation do you think inflation of stagflation is more likely?

Definitely stagflation rather than inflation, although the word 'stagflation' has connotations with 70's style high inflation, and I'm not convinced we'll be seeing that. I see rises in commodity prices over the next few years being offset by subdued labour costs.

The elephant in the room is the dire fiscal position we're in. If Govt finances weren't so bad then we might have more options, but the need to rein in the public deficit after the next election is going to hit the economy hard, and disposable household income is going to be hit VERY hard.

There are basically four ways the public sector deficit problem can be addressed (or a mixture of the four):

1) Increased taxation – will reduce disposable incomes and remain a drag on the economy for years.

2) Reduced public spending – will squeeze incomes in the public sector and raise unemployment.

3) Borrowing – only a temporary fix, and will require a higher domestic savings ratio (which will reduce demand in the economy) and higher interest rates (which with the huge overhang of debt we've got will also reduce disposable income).

4) Outright inflation (i.e. debasement of the currency to inflate away Government debt).

It's only number 4 that really concerns me. So the question is, can it be achieved? Maybe, but my argument has always been that it's not so easy these days for first-world governments to go down this road. We're already seeing longer-term rates moving up both here and in the U.S. as policies such as QE are pursued, and ultimately I think this is going to be the constraint that prevents outright printing away of the debt. The markets will drive up interest rates in any country that effectively tries to default on its debt through inflation.

I also think we're heading towards an era of higher real interest rates. Base rates may be held low for some time, but market rates won't be that low as banks reassess risk and rebuild their balance sheets. Access to credit will be restricted.

I may be naïve, but with my funds spread across several currencies at this moment I'm not losing sleep over my savings being inflated away. To me higher consumer price inflation just means a greater squeeze on household income, causing asset prices to fall faster. I don't believe I'm going to wake up tomorrow with global Weimar-style inflation all around me, and if that's the endgame then I think I'll be able to see it coming and will act accordingly.

In short, I still see a long, hard, Japan-style slog ahead of us. Maybe not deflation or depression, but it will feel like a never-ending recession.

[lufc]

If you want the scary, conspiratorial explanation for quantitative easing (QE), it's this:

The current proposed purchases by the BoE under QE will create £125bn of new central bank reserves (narrow money) within the banking system. The banks can then leverage these reserves and buy government debt. They will be able to buy much more than the base £125bn that has been injected into the system through QE.

Why would the banks buy government bonds though? Well, they're going to be forced to under the new Liquidity Asset Buffer requirements that the FSA is putting in place (I believe these are due to come into effect from October, but banks will probably start buying gilts and other govt bonds before then). In Chapter 6 of December's consultation paper the FSA suggested what assets would qualify for inclusion in the buffer:

Since other banking regimes around the world will likely be introducing similar liquidity requirements, this all works out rather nicely. UK banks buy gilts but they also buy foreign govt bonds to cover non-domestic liabilities, and foreign banks around the world buy UK gilts to cover sterling liabilities. It would certainly qualify as being labelled a giant Ponzi scheme, and with the commercial banks in the market the DMO will have considerably less problem in selling its gilts.

[i wonder which banks will end up buying the most gilts...RBS and Lloyds perchance? That would also mean that the government is effectively paying interest to itself, and the cost of funding public borrowing wouldn't be as high as it looks on paper.]

The timing of QE fits in perfectly with the introduction of the new FSA liquidity regime. It's building reserves up just in time for the banks to start leveraging them into gilts and foreign government bonds.

Murray Rothbard described this form of deficit financing in 'The Mystery Of Banking' (page 105ff in the 1983 edition). He said it combined the worst of all worlds because it's both inflationary and it imposes future heavy burdens on taxpayers. It's commercial banks who gain.

But hey, those poor bankers have had a hard time recently. It's only right that we rebuild their profits and get the bonuses going again.

This puts the fear of God into me FT.

The possibility of leveraging "printed money" has been discussed on HPC before and was inconclusive.

As I see it this could only be done by the Boe buying Gilts directly and not by the current reverse auction scenario ... this of course would break the rules (not that any one seems to give a sh!t anymore).

IMHO on a global scale this is very worrying ... China are already making noises about QE, sometime soon the Middle East will want to have a say aswell.

Edited to add : For all Obama's and Brown's words, this is just about as protectionist as you can get !!!

Edited May 12, 2009 by lufc

[FreeTrader]

This puts the fear of God into me FT.

The possibility of leveraging "printed money" has been discussed on HPC before and was inconclusive.

As I see it this could only be done by the Boe buying Gilts directly and not by the current reverse auction scenario ... this of course would break the rules (not that any one seems to give a sh!t anymore).

IMHO on a global scale this is very worrying ... China are already making noises about QE, sometime soon the Middle East will want to have a say aswell.

Edited to add : For all Obama's and Brown's words, this is just about as protectionist as you can get !!!

lufc,

In the FSA's consultation paper they commented that the average UK bank currently has 4.6% of its assets in government bonds. With £6 trillion in total assets, this puts bank holdings of govt bonds at roughly £275bn (this won't only be gilts – a good proportion will be foreign govt bonds).

The FSA doesn't say what the new liquid asset buffer requirements will be, and it sounds as though each bank will have its own figure based on certain stress tests and other yardsticks. However, in its analysis of the costs to the banks of the new regime the FSA says:

“Our aforementioned assumption is that the top ten UK banks will increase their government bond holdings from an average of 4.6% to between 6% and 10% on average.”

So, if we assume the average is going to be 8% of total assets across the banking sector, that means an uplift of around £200bn in govt holdings at the banks. It's still a great deal less than the £800bn of issuance that's due over the next 5 years, but I would expect the extra purchases of gilts to take place over the next couple of years, taking the heat off the DMO at its auctions and giving breathing space for a new government to chop the deficit and reduce the borrowing requirement.

The new reserves injected under QE should easily give the commercial banks enough funds to buy £200bn of govt bonds, or even more if need be. However I can't really see the banks buying anything much longer than 5 years duration, so that means we may well see yields continue to rise at the long end.

It does all fit together rather nicely. The BoE is buying gilts of 5-25 year duration, so this is withdrawing supply from the middle/long end of the curve. The banks will buy the short end, and that will reduce the current rollover risk that the DMO faces. Institutions with fixed liabilities (e.g. pension funds) will continue to buy the long end.

If this is the plan it's a very smart one and it may yet get the UK Government out of jail (at least for a couple of years). It's basically a sophisticated fraud which monetises public debt, but it's one that's difficult to pin down.

Here's the big tell: if the BoE unwinds QE and sells its gilts back into the market, then you can ditch this theory. If they hang on to them though, even with inflation rising, then it would suggest to me that there's some truth in this.

Here's a chart that shows how the BoE's QE purchases are currently reducing the amount of conventional gilts available to the market. Just before QE started there was major gilt redemption by the DMO of £17.2bn which is why the blue area suddenly dips. Then when QE gets under way you can see that the BoE is buying gilts faster than the DMO is auctioning them.

[Technical note: the BoE has purchased £54.5bn of gilts so far, but the average purchase price was above par, so the amount of nominal bought was less.]

[aliveandkicking]

In the FSA's consultation paper they commented that the average UK bank currently has 4.6% of its assets in government bonds.

The FSA ....... new liquid asset buffer requirements ...... in its analysis of the costs to the banks of the new regime the FSA says:

"Our ...... assumption is that the top ten UK banks will increase their government bond holdings from an average of 4.6% to between 6% and 10% on average."

......The new reserves injected under QE should easily give the commercial banks enough funds to buy £200bn of govt bonds,.....

It does all fit together rather nicely. The BoE is buying gilts of 5-25 year duration, so this is withdrawing supply from the middle/long end of the curve. The banks will buy the short end, and that will reduce the current rollover risk that the DMO faces. .......

If this is the plan it's a very smart one and it may yet get the UK Government out of jail (at least for a couple of years). It's basically a sophisticated fraud which monetises public debt, but it's one that's difficult to pin down.

Not sure why you are saying this is fraud.

A banks total Assets include the long term customer repayments which balance the liability risk the bank must pay out cash today to remain solvent, so that a banks losses today can have a very significant impact on its ability to meet customer withdrawal requests today (as compared to slowly paying out on demand depositors needs as the repayments flow to the bank from the majority of the still performing assets).

For centuries, the UK commercial banks acting in cooperation with the BOE and Government have levered the small base money supply of Cash and Cash Equivalents which they all settle in to produce the much greater amount of privately generated and internally circulating Commercial bank money that only one particular banks customers are using as Deposit money or Deposits. Until recent times the BOE demanded that a proportion of total privately created money deposits had to be backed by a much smaller amount of cash or cash equivalents.

But this financial crisis has been in part created by even regulated banks abusing the new capital adqequacy rules which require no obligatory holdings of base money in the UK, to Lever themselves to the maximum that is possible under the fractional reserve banking system that operates today in the UK with only voluntary 'required reserves'. Essentially it was an experiment from my point of view where laizzez-faire ideas have gone horribly wrong.

Therefore the FSA documents are saying that the ability to withstand a liquidity crisis by the banks must be improved back up to prudent levels. All the regulators have been mouthing these comments since this crisis began because the SIV scandal blew a massive hole in prudential oversight by the likes of the FSA who were naive or incompetant or in collusion with the banks.

http://en.wikipedia.org/wiki/Money_supply#...reserve_banking

http://www.bankofengland.co.uk/education/c...df/ccbshb24.pdf

8 REQUIRED AND VOLUNTARY RESERVES

"Reserve requirements are the percentage of commercial banks' liabilities (or some sub-set thereof) which they are required to hold as reserves at the central bank. An increase in reserve requirements forces the banks to hold more balances at the central bank, other things being equal. The banks have no discretion. Historically, reserve requirements were regarded by some central banks as a prudential instrument"

"to ensure that banks had sufficient liquidity in case of withdrawal of deposits - rather than for monetary policy purposes. However, the importance of compulsory reserves as a prudential tool has lessened, ........ because:

" the range of other liquid assets available to commercial banks has increased markedly, including assets which the central bank may itself be willing to accept as collateral;"

Edited May 13, 2009 by aliveandkicking

[Ash4781]

http://www.forbes.com/feeds/afx/2009/05/12/afx6409386.html

LONDON, May 12 (Reuters) - Britain found strong demand at a sale of long-dated gilts on Tuesday, with investors attracted by the recent rise in yields and relative value plays.

The sale of 4.75 percent gilts due 2030 attracted bids worth 2.24 times the 2.25 billion pounds on offer, well above the 1.37 cover at the last sale of this bond in November.

Gilt futures pared losses after the result, reversing their earlier underperformance versus Bunds.

Analysts said demand was boosted by the cheapness of the gilt, both on an outright basis and relative to gilts of a similar maturity. The Bank of England's decision to buy more than one billion pounds of gilts due 2032 on Monday left many investors with more room in their portfolios.

'A lot of people sold the 2032s to the Bank of England yesterday and are buying the 2030s today,' Jason Simpson, a gilts strategist at Royal Bank of Scotland ( RBS - news - people ). 'The issue was also cheap. It hadn't been re-opened since November.'

Long-dated gilt yields have been on an upward climb since mid-March, driven by a combination of supply worries and evidence that the pace of the economic downturn is starting to slow.

The yield on the 2030 gilt was almost 60 basis points higher at Tuesday's auction than at the last auction of this gilt last November.

'For a long-dated gilt auction it's gone very well,' said Charles Diebel, a fixed income strategist at Nomura International. 'The tail of just 0.4 basis points was impressive and the gilt has traded higher in the aftermarket.'

BOE inflation report due today

[FreeTrader]

Not sure why you are saying this is fraud.

It's not legally fraud, but in my opinion it's technically a fraud. It's a very neat way of by-passing Article 101 of the Maastricht Treaty. New central bank reserves are indirectly financing gilt sales.

I'd agree with you if the banks were being forced by the FSA to improve the liquidity of their present asset mix. But they're not being required to do that, and indeed it would be highly deflationary if they had to satisfy FSA liquid asset buffer requirements under the pre-QE conditions.

However QE will enable them improve balance sheet liquidity at no cost whatsoever. The new reserves supplied by the BoE will easily cover the purchasing of gilts the FSA are demanding.

Let's remember that before this crisis started the whole of the UK banking system managed to support a £6,000 billion asset portfolio on only £20 billion of reserves. Once the present allocated gilt purchases under QE has finished, there will be over £150 billion of reserves in the system.

[FreeTrader]

http://www.forbes.com/feeds/afx/2009/05/12/afx6409386.html

Ash, the arbitraging between the 2030 and 2032 gilts cited in that article you posted bears out my comment earlier to ParticleMan. The cover at DMO auctions looks good at present because the QE purchases are allowing traders to make a nice turn by buying from the DMO and selling to the BoE.

[Jack's Creation]

http://www.ft.com/cms/s/0/76a47408-3f3a-11de-ae4f-00144feabdc0.html

A group of Republican and Democratic lawmakers will on Wednsday revive a bill that threatens to raise tariffs on Chinese goods to punish the country for what they call “currency manipulation”.

Highlighting the protectionist sentiment within Congress, the bill would let companies apply for tariffs on imports from countries deemed to be deliberately undervaluing their currencies to be more competitive. China is its main target.

“By illegally subsidising its exports through the undervaluation of its currency by 30 per cent or more, China distorts the gains from trade, creates barriers to free and fair trade, harms US industries and has destroyed millions of US jobs,” those sponsoring the bill said in a statement.

Their move comes as countries across the world consider protectionist trade rules in the face of recession. Measures such as anti-dumping investigations rose 18.8 per cent in the first quarter of this year against the same period in 2008, according to research by Chad Bown at the Brookings Institution, with China’s exporters the target in two thirds of those cases.

In the US there have been several attempts in the past four years to introduce a currency manipulation bill, none of which has gained real traction. On the campaign trail, Barack Obama suggested China was a currency manipulator, but his administration has since backed away from confrontation over the issue.

Nonetheless, a group of lawmakers from manufacturing-dominated states are determined to give it another try and some analysts think the US recession could help build support this time. The charge in the Senate will be led by Debbie Stabenow, a Democrat from Michigan, and Jim Bunning, a Republican from Kentucky. In the House, it will be pushed by Tim Ryan, a Democrat from Ohio, and Tim Murphy, a Republican from Pennsylvania.

They will be joined at the bill’s launch by a coalition of labour and business leaders who feel they have been hurt by the value of the renminbi.

“The rising unemployment rate in the US warns that there might be more support for such a measure than in the past,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

“Even if the measure dies an ignoble death like the other bills, the mere proposal reminds China and others of the protectionism that lurks below the surface in the United States.”

The US is not alone in facing rising protectionist sentiment. Three-quarters of the new anti-dumping investigations launched this year were by developing countries – half by India and Argentina alone.

The Treasury is legally obliged to determine every six months whether any country is manipulating its currency to gain an unfair trade advantage. Last month the administration disappointed manufacturers and trade groups by deciding not to pick a fight with China, a crucial US creditor, saying instead it had “shown great commitment to playing a stabilising role in the system”.

Welcome to interesting times! What do you reckon, another damp squib?

Edited May 13, 2009 by Jack's Creation

[Timm]

“By illegally subsidising its exports through the undervaluation of its currency by 30 per cent or more, China distorts the gains from trade, creates barriers to free and fair trade, harms US industries and has destroyed millions of US jobs,” those sponsoring the bill said in a statement.

That's dreadfull!

We must not let the wily Chinaman distort the value of money to the gain of his nation. Can you imagine if a western country tried to do this?

[CharlieChuck]

lufc,

In the FSA's consultation paper they commented that the average UK bank currently has 4.6% of its assets in government bonds. With £6 trillion in total assets, this puts bank holdings of govt bonds at roughly £275bn (this won't only be gilts – a good proportion will be foreign govt bonds).

The FSA doesn't say what the new liquid asset buffer requirements will be, and it sounds as though each bank will have its own figure based on certain stress tests and other yardsticks. However, in its analysis of the costs to the banks of the new regime the FSA says:

“Our aforementioned assumption is that the top ten UK banks will increase their government bond holdings from an average of 4.6% to between 6% and 10% on average.”

So, if we assume the average is going to be 8% of total assets across the banking sector, that means an uplift of around £200bn in govt holdings at the banks. It's still a great deal less than the £800bn of issuance that's due over the next 5 years, but I would expect the extra purchases of gilts to take place over the next couple of years, taking the heat off the DMO at its auctions and giving breathing space for a new government to chop the deficit and reduce the borrowing requirement.

The new reserves injected under QE should easily give the commercial banks enough funds to buy £200bn of govt bonds, or even more if need be. However I can't really see the banks buying anything much longer than 5 years duration, so that means we may well see yields continue to rise at the long end.

It does all fit together rather nicely. The BoE is buying gilts of 5-25 year duration, so this is withdrawing supply from the middle/long end of the curve. The banks will buy the short end, and that will reduce the current rollover risk that the DMO faces. Institutions with fixed liabilities (e.g. pension funds) will continue to buy the long end.

If this is the plan it's a very smart one and it may yet get the UK Government out of jail (at least for a couple of years). It's basically a sophisticated fraud which monetises public debt, but it's one that's difficult to pin down.

Here's the big tell: if the BoE unwinds QE and sells its gilts back into the market, then you can ditch this theory. If they hang on to them though, even with inflation rising, then it would suggest to me that there's some truth in this.

Here's a chart that shows how the BoE's QE purchases are currently reducing the amount of conventional gilts available to the market. Just before QE started there was major gilt redemption by the DMO of £17.2bn which is why the blue area suddenly dips. Then when QE gets under way you can see that the BoE is buying gilts faster than the DMO is auctioning them.

[Technical note: the BoE has purchased £54.5bn of gilts so far, but the average purchase price was above par, so the amount of nominal bought was less.]

That's an interesting graph, not quite what I expected, I was assuming the BOE were taking up the new issuances by the back door rather than buying more than the DMO were issuing, this is quite worrying as the really big issues that are needed over the coming months/year haven't really started yet.

I've noticed the yields on 10 year have been creeping back up again this past week.

The next gilt redemeption is the Dec 09 one (is that right) do you know how much of this is outstanding?

[FreeTrader]

The next gilt redemeption is the Dec 09 one (is that right) do you know how much of this is outstanding?

£15.6bn

Hey, does anyone know if the BoE's Inflation Report webcast is running today? They normally stream it live, but I can't see a link this time on the BoE's website.

Merv is expected to get a grilling on QE.

[Injin]

There are basically four ways the public sector deficit problem can be addressed (or a mixture of the four):

1) Increased taxation – will reduce disposable incomes and remain a drag on the economy for years.

2) Reduced public spending – will squeeze incomes in the public sector and raise unemployment.

3) Borrowing – only a temporary fix, and will require a higher domestic savings ratio (which will reduce demand in the economy) and higher interest rates (which with the huge overhang of debt we've got will also reduce disposable income).

4) Outright inflation (i.e. debasement of the currency to inflate away Government debt).

5) State failure. Currency revulsion.

[planit]

That's an interesting graph, not quite what I expected, I was assuming the BOE were taking up the new issuances by the back door rather than buying more than the DMO were issuing, this is quite worrying as the really big issues that are needed over the coming months/year haven't really started yet.

I've noticed the yields on 10 year have been creeping back up again this past week.

The next gilt redemeption is the Dec 09 one (is that right) do you know how much of this is outstanding?

The fact that the BOE are buying more bonds than the DMO is issuing and the rates are still rising is not good news. This looks like it is unsustainable and the money is going to run out very quickly.

I would think that the BOE wanted to be buying less than the issues ideally and that the investor appetite for gilts carried on and the market were nett purchasers. As it is the market are nett sellers which doesn't look good.

Could be the first sign that the Bond Vigilantes are out.

[aliveandkicking]

It's not legally fraud, but in my opinion it's technically a fraud. It's a very neat way of by-passing Article 101 of the Maastricht Treaty. New central bank reserves are indirectly financing gilt sales.

I'd agree with you if the banks were being forced by the FSA to improve the liquidity of their present asset mix. But they're not being required to do that, and indeed it would be highly deflationary if they had to satisfy FSA liquid asset buffer requirements under the pre-QE conditions.

However QE will enable them improve balance sheet liquidity at no cost whatsoever. The new reserves supplied by the BoE will easily cover the purchasing of gilts the FSA are demanding.

Let's remember that before this crisis started the whole of the UK banking system managed to support a £6,000 billion asset portfolio on only £20 billion of reserves. Once the present allocated gilt purchases under QE has finished, there will be over £150 billion of reserves in the system.

Banks world wide are accumulating reserves in expectation of none renewal of term wholesale loans and worsening loan loss rates. So they are already moving to a far more prudent level of retained capital than before this crisis began. Once they have the reserves they seek a profitable liquid home for them which is then lending short term to other banks or investing in gilts and so forth.

There is no way banks are going back to the leverage they had before this crisis began for maybe generations to come when they will have by then forgotten again the meaning of risk and prudence and the need to retain sufficient reserves to weather a storm.

6000:20 is 1500:1 6000:150 is 40:1. Banks like lehmans were at 40:1. Ie 2.50 of your own capital when borrowing 100 to lend 100. If somebody wants 100 back you only have 2.5

Deflationary forces are now massive because the banks know what they are facing.

[Injin]

Banks world wide are accumulating reserves in expectation of none renewal of term wholesale loans and worsening loan loss rates. So they are already moving to a far more prudent level of retained capital than before this crisis began. Once they have the reserves they seek a profitable liquid home for them which is then lending short term to other banks or investing in gilts and so forth.

There is no way banks are going back to the leverage they had before this crisis began for maybe generations to come when they will have by then forgotten again the meaning of risk and prudence and the need to retain sufficient reserves to weather a storm.

6000:20 is 1500:1 6000:150 is 40:1. Banks like lehmans were at 40:1. Ie 2.50 of your own capital when borrowing 100 to lend 100. If somebody wants 100 back you only have 2.5

Deflationary forces are now massive because the banks know what they are facing.

Translation -

Banks have lied to their savers and need it printing up or they will get lynched.

This will destroy all currencies.

[Bloo Loo]

Translation -

Banks have lied to their savers and need it printing up or they will get lynched.

This will destroy all currencies.

they weren't lying, they were deluded by their own hype about risk being abolished by clever financial instruments, which only worked if you were mad, or stupid, or gullible.

[aliveandkicking]

It's not legally fraud, but in my opinion it's technically a fraud. It's a very neat way of by-passing Article 101 of the Maastricht Treaty. New central bank reserves are indirectly financing gilt sales.

Very very technical by the sounds of it given the nature of the Treaty in the current circumstances of national emergency across the entire EU?

http://www.tcd.ie/Economics/SER/sql/download.php?key=60

The Maastricht Treaty sets limits for government deficits and debt/GDP ratios that

should not be exceeded other than in ‘exceptional and temporary circumstances’,

thus setting the rules for fiscal policy in the Euro Area. These regulations are further

detailed in the Stability and Growth Pact, which also gives a specification for when

the rules can be breached without repercussions.

The Maastricht Treaty and the Stability and Growth Pact

The Maastricht Treaty consists of five articles detailing the parameters for

fiscal policy as a macroeconomic tool. Article 99 is concerned with policy

coordination and surveillance; Article 101 bans monetary financing of a budget

deficit;

Some call for changes in the pact, whereas others question the shortsightedness of those

responsible for the pact. As MEP Helsingin Samomat said to Romano Prodi whilst

as one of his criticisms of the pact: ‘It should not come as a surprise for the

Ministers of Finance or the Commission that after economic growth comes a

downturn’ (22/10/2002). This is the main problem with the pact; the estimations for

economic growth were overly optimistic at the time when it was agreed upon and a

downturn has occurred before any sort of medium term balance has been achieved.

Thus the problem is not the pact itself, or the allowances it makes towards flexibility,

but rather the overly optimistic assumptions behind it.

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