The Gilts Thread

[FreeTrader]

Paragraph 29 of the minutes of the last MPC meeting depressingly confirms that central bankers have learned nothing from this crisis (my emphasis):

The near-term downside risks to economic activity had lessened during the month. And there

was a possibility that the recovery in asset prices and confidence could mark the start of a virtuous

upward spiral for the economy. In addition to these positive developments in activity and asset

markets, inflation would probably be higher in the short-term than the Committee had thought a

month ago, though it was still likely to be extremely volatile.

Asset prices are rising and this will encourage us to borrow and spend. Rinse and repeat.

[Injin]

unbelievable.nice find FT.

I don't know whether you follow economics professors much but seeing nouriel roubini banging on about fiscal stimuli and recovery next year had my head in my hands.

how can so many learned academics have got it so wrong.

They get paid by the central bank or have spent decades in state "learning" establishments.

To get by under a communist dictatorship, you had to be well versed in all the communist folklore - and that meant those most likely to succeed were either outright cynics who would say whatever you wanted to hear in order to get more for themselves or psychologically inclined to believe in communism.

It's the same with this system, any system in fact - to get on in you have to believe in the core tenets or be willing to lie that you are - these being that that human behaviour can be predicted, central planning can work if everything is correctly modeled, inflation is a price index, government good/freedom bad etc etc

If you wrote the truth you wouldn't even make it passed GCSE.

Edited September 23, 2009 by Injin

[Deckard]

If you wrote the truth you wouldn't even make it passed GCSE.

I bet that's based on personal experience

[Injin]

I bet that's based on personal experience

It is - I wrote all kinds of rubbish to get my qualifications, mostly through gritted teeth.

[Bloo Loo]

The recovery in equity and house prices meant that collateral

values had risen, which should, other things equal, increase the availability of credit and reduce the

cost of borrowing.

ponzi makes a comeback. assets rise, so collateral rises so credit becomes available to lend to bidders to make the assets rise, so collateral rises so credit becomes available to lend to bidders to make assets rise......

have they really no more imagination than this?? its not creating anything...its just inflation.

[lowrentyieldmakessense(honest!)]

I think that people have got it wrong, and it is nothing to do with QE or money supply.

Short of a dollar collapse (which is not probable but remotely possible), positive rpi is going to be persistent longer than people think (perhaps years). Ultimately though, it will go negative for some time, along with asset values. This is coming, but not yet.

I've looked at historical parallels. This has nothing to do with the money supply. The RPI chart above fits my expectations precisely.

which ones

[Injin]

which ones

He's talking about RPI and he's quite right - RPI will be anything the bankers want it to be, including mauve if it serves a purpose.

[Injin]

I see they are now questioning their core stated reason for keeping rates low...i.e. that the output gap could be narrower than they thought because supply capacity may have been destroyed.

(I commented a month or two back that there are 2 ways to close an output gap. lol)

So now they are relying on historical surveys of 'inflation expectations'...such expectations that are heavily influenced by their own pronouncements.

And they also say that inflation will rise quite sharply. But it's okay - because it is "past price rises" (when are they not?).

EDIT: What really depresses me is the prospect of lots of posts by Daddy Bear right into the New Year.

Cheer up mate - the blackouts will start soon and then you won't have to read them.

[Bloo Loo]

He's talking about RPI and he's quite right - RPI will be anything the bankers want it to be, including mauve if it serves a purpose.

peuce would be more appropriate.

[Number79]

duplicate

Edited September 23, 2009 by richyc

[Number79]

EDIT: What really depresses me is the prospect of lots of posts by Daddy Bear right into the New Year.

Edited September 23, 2009 by richyc

[MinceBalls]

It is - I wrote all kinds of rubbish to get my qualifications, mostly through gritted teeth.

Nothing like a nice bit of hoop jumping

[Toto deVeer]

which ones

When I speak of inflation or deflation here, I am talking of the effect as upon prices, not the monetary definition.

Firstly, I have tried to determine whether there have been any periods in history similar to what the US is going through. I think that I have found one, not exactly the same, but underlying conditions are comparable. This is the post US Civil War period. This leads me to believe that the QE or stimulus will not have any impact, other than a very short transient effect. I believe that we can completely disregard this effort (provided it does not lead to a currency crisis). Let me explain.

What are the underlying factors? Let's look at the period bounded by the US Civil War. Prior to the the war, the Natchez Trace boasted 7 of the 10 wealthiest people of the world. This was build upon the trade of cotton; but there was essentially no labour cost associated with the economy due to slavery. After the war, slavery was abolished and the plantation system collapsed, taking with it the economy and wealth of the south. Large national debt was incurred by both the southern states and US federal government; an historical extreme. Some of this was never paid back. During the period 1865 to 1869, prices of goods and services inflated. However, according to Rothbard, from 1869 to 1879 prices of goods and services deflated, about -3.8% per year, each year, even though the money supply was expanded by about +3% per year. There was also strongly positive GDP growth in the US, even though the bank run of 1873 and an international property value collapse punctuated this decade.

I contend that slavery was a vast deflationary engine; if we define deflation as a reduction of the price of goods and services, as cotton was analogous to the 'oil of the time'. When this price deflationary factor was removed, the adjustment in prices was inevitable. After price readjustment occurred, then debt deleveraging became the driving factor of price discovery, and probably was a factor associated with the 1873 bank panic.

Now today, the western economies, particularly the US, has again benefited from the near slavery wage structure of the east, and in a sense, Asia has been a vast deflationary machine for the world. But this has resulted in many structural imbalances that could not be sustained.

So the financial crisis that we see is the first stage of the unwinding of these imbalances. In turn, the shock is causing Asia to 'unplug' or 'decouple' from the west, and concentrate on domestic and regional trading. The decoupling can be observed in the shipping figures that are just not recovering. In addition, trade protectionism will continue to expand. Although, in my view, this 'decoupling' is a healthy thing for the world economy in the longer term, it will lead to very significant price adjustments in the western world for some time.

Therefore, just like the post Civil War period, the deflationary prop is being removed from western economies. This is going to lead to persistent price inflation. Eventually, once prices have reached an equilibrium level, which will probably be some months or years after trade has become more balanced, price deflation will begin in earnest as the deleveraging of debt becomes the overwhelming force behind the economy.

So in, my expectation, there will be persistent price inflation, followed by a longer period of persistent price deflation during the major deleveraging process, that must ultimately include the deleveraging or default of the US national debt that will weigh down consumers for decades. In addition, the idea that the government can inflate away future obligations is a nonsense, and the most critical obligations lie ahead of the US, not behind. Therefore deflation will be needed to reduce future obligations, such as the stimulus spending, social security and health care costs. Deflation will also be needed to rebalance global trade, wage and asset values.

So what we see in the RPI of most western economies so far can be exactly explained by this phenomenon. An initial collapse in the RPI; as existing inventories in the west are liquidated, but this is not followed by replenishment from Asia, as finance for consumption dries up. According, ships lay idle, the Baltic Index does not recover, Asia realizes she must begin the decoupling process, particularly China. Thus prices begin rising again in the western economies. As to the effect upon asset prices; ultimately these must decline, but there will be many oscillations along this path.

We in the west are in for interesting times indeed.

[Injin]

Civil war stuff

That's actually a fair comparison - most notable is that you cannot compete with slaves on labour cost without nuking your own standard of lviing and/or making your own workers into slaves.

This is obviously what the "elite" in the west have set out to do.

I'd disagree with it being deflationary price wise for the majority though - what could be more pricey than a complete inability to afford even the shirt on your back or even food?

As for the government being unable to inflate away debt obligations - that's pure nonsense. They can just add a zero or twelve to the currency and pay everything nominally - provided they keep the armed forces sweet and an inner cadre paid up there is very little anyone can do to stop them.

Edited September 23, 2009 by Injin

[Toto deVeer]

As for the government being unable to inflate away debt obligations - that's pure nonsense. They can just add a zero or twelve to the currency and pay everything nominally - provided they keep the armed forces sweet and an inner cadre paid up there is very little anyone can do to stop them.

Debt is a past obligation. What I have said is that inflation is no benefit for future obligations. If you have a future obligation, and you inflate the currency, that future obligation must be paid in future currency. The US faces future obligations of perhaps $100 trillion, whereas the past obligation is about $14 trillion. This can only be reduced through deflation. The only solution is to achieve what was achieved during the period of 1869 to 1879. Using Rothbards numbers, the future obligations after a similar ten year period as 1869 to 1879 would go from about 100/14 = 714% GDP to 68/22 = 310% GDP.

Edited September 23, 2009 by Toto deVeer

[Traktion]

Great post Toto deVeer! I like the slave comparison too - very interesting!

[Bloo Loo]

Debt is a past obligation. What I have said is that inflation is no benefit for future obligations. If you have a future obligation, and you inflate the currency, that future obligation must be paid in future currency. The US faces future obligations of perhaps $100 trillion, whereas the past obligation is about $14 trillion. This can only be reduced through deflation. The only solution is to achieve what was achieved during the period of 1869 to 1879. Using Rothbards numbers, the future obligations after a similar ten year period as 1869 to 1879 would go from about 100/14 = 714% GDP to 68/22 = 310% GDP.

thats right...no good a shopkeeper paying his supplier in the morning, sell out, only to find he cant afford the restock.

[lowrentyieldmakessense(honest!)]

When I speak of inflation or deflation here, I am talking of the effect as upon prices, not the monetary definition.

Firstly, I have tried to determine whether there have been any periods in history similar to what the US is going through. I think that I have found one, not exactly the same, but underlying conditions are comparable. This is the post US Civil War period. This leads me to believe that the QE or stimulus will not have any impact, other than a very short transient effect. I believe that we can completely disregard this effort (provided it does not lead to a currency crisis). Let me explain.

What are the underlying factors? Let's look at the period bounded by the US Civil War. Prior to the the war, the Natchez Trace boasted 7 of the 10 wealthiest people of the world. This was build upon the trade of cotton; but there was essentially no labour cost associated with the economy due to slavery. After the war, slavery was abolished and the plantation system collapsed, taking with it the economy and wealth of the south. Large national debt was incurred by both the southern states and US federal government; an historical extreme. Some of this was never paid back. During the period 1865 to 1869, prices of goods and services inflated. However, according to Rothbard, from 1869 to 1879 prices of goods and services deflated, about -3.8% per year, each year, even though the money supply was expanded by about +3% per year.

didnt the US go back on to the Gold Standard (sort of) in 1873

[Ash4781]

Paragraph 29 of the minutes of the last MPC meeting depressingly confirms that central bankers have learned nothing from this crisis (my emphasis):

Asset prices are rising and this will encourage us to borrow and spend. Rinse and repeat.

Don't they have to say that though?

I'd be surprised if they came out and said QE didn't have a chance of working.

[Toto deVeer]

didnt the US go back on to the Gold Standard (sort of) in 1873

I'm not 100% sure as to the type of standard that was in place; there was a sort of bimetallic standard in place and this included silver and gold (15:1); eventually silver was phased out. But to me the key is what happened to the money supply that Rothbard indicated was increased during this 10 year period by about +3% y/y.

[Injin]

Debt is a past obligation. What I have said is that inflation is no benefit for future obligations. If you have a future obligation, and you inflate the currency, that future obligation must be paid in future currency. The US faces future obligations of perhaps $100 trillion, whereas the past obligation is about $14 trillion. This can only be reduced through deflation. The only solution is to achieve what was achieved during the period of 1869 to 1879. Using Rothbards numbers, the future obligations after a similar ten year period as 1869 to 1879 would go from about 100/14 = 714% GDP to 68/22 = 310% GDP.

Or you can just pay it in currency with addeed zeroes.

The obligation is in dollars - so lamping out pensions (for example) that are supposed to be $100,000 p.a. in envelopes that cost $50,000 and the stamp $75,000 is one way of both paying them and not paying them.

It's a definie benefit - because the government cn maintain it's resource use while minimising it's outgoings in paper.

[ccc]

A purely debt based monetary system cannot work with long term low interest rates. The temptation to just create 'money' out of thin air is too great. It doesn't work.

You would think the almost complete collapse of the World's financial system would prove this point. Clearly not. All the chumps in charge just want to get back to 2007 and be done with it.

[FreeTrader]

http://vixandmore.blogspot.com/2009/09/whe...e-treasury.html

"Where and how to analyze Treasury auction results"

from a very good blog "Vix and more"

There's a slightly easier way to get Treasury auction results than listed in that blog.

Just bookmark this page. From there you can get the latest results from the "Today's Auctions Results" link, search previous auctions, and see upcoming auctions.

[moonriver]

http://www.bloomberg.com/apps/news?pid=new...id=aOsLPPiSJhH0

U.K. Government Bonds Rise; 10-Year Note Yield Declines to 3.59 per cent.

Sept. 28 (Bloomberg) -- U.K. gilts rose, with the yield on the benchmark 10-year note falling 2 basis points to 3.59 percent as of 8:14 a.m. in London.

http://www.bloomberg.com/apps/news?pid=new...id=afEkgKobhMHM

U.K. Two-Year Government Bonds Decline; Yield at 0.74 Percent

Sept. 28 (Bloomberg) -- U.K. two-year government bonds declined, pushing the yield on the gilt 2 basis points higher to 0.74 percent as of 9:34 a.m. in London.

A question to those in the know, from an hpc'er who knows not a lot....

why this opposite movement in 10 year and 2 year yields ?

[Guest_chris c-t_*]

A question to those in the know, from an hpc'er who knows not a lot....

why this opposite movement in 10 year and 2 year yields ?

Bank of England buying 10yr because no-one else will?

EDIT to keep those all-important mortgage rates down?

Edited September 28, 2009 by chris c-t