Quantitative Easing - B.o.e. Buying Govt Debt From D.m.o. In Form Of Gilts

[loginandtonic]

BOE is printy printy electronically and buying gilts from the Debt Mad Orifice whoops I mean Management Office.

BOE is using QE thin air money creation.

This is the govt printing money to pay its debts by an underhand method.

How come this is allowed and not a massive outcry from the Opposition, Cable, LibDem, the EU, IMF, Zeus, Peter Pan and everyone else?

This seems a blatant Zimbabwe like M.O. - what gives??

[Kazuya]

Welcome to Britbabwe sir. Gordon Mugabe and Mervyn Tsvangiri will be with you soon.

[Concrete Jungle]

It was my understanding the DMO sold government debt "to the market". Then the BoE created new money to buy the government debt from "the market" via reverse auctions. The market bought the debt from the DMO and sold it to the BoE at a profit, nice work if you can get it. In summary the BoE are indirectly buying government debt via bond traders and the bond traders make a nice commission, this allows the DMO and BoE to circumnavigate the Maastricht treaty that outlaws central banks directly buying government debt. Everyones appy.

[Jin]

what gives??

Fiat currency will

[aliveandkicking]

It was my understanding the DMO sold government debt "to the market". Then the BoE created new money to buy the government debt from "the market" via reverse auctions. The market bought the debt from the DMO and sold it to the BoE at a profit, nice work if you can get it. In summary the BoE are indirectly buying government debt via bond traders and the bond traders make a nice commission, this allows the DMO and BoE to circumnavigate the Maastricht treaty that outlaws central banks directly buying government debt. Everyones appy.

The Maastricht treaty allows for exceptional circumstances but they are not very clearly defined. I think we can safely say we have exceptional circumstances.

I personally think that deflation would be a terrible outcome. Others seem to think it will benefit them.

The BOE operations are more i think to add money to the system, keep it liquid and ensure we dont get deflation. They cant possibly buy all of the uk debt that exists in the universe. Even one year of Goverment debt issuance is twice what the BOE have so far decided to spend i think.

Meanwhile there is 75b for gilts purchase across the spectrum of gilts old and new and 50b for corporate debt purchase.

It seems sensible to me given they are the government and they dont want deflation. Also hard to believe they are going to fail in the objective either.

At the end of the day it probably leads to a stagflationary situation that grinds on for years to come.

[huw]

It was my understanding the DMO sold government debt "to the market". Then the BoE created new money to buy the government debt from "the market" via reverse auctions. The market bought the debt from the DMO and sold it to the BoE at a profit, nice work if you can get it. In summary the BoE are indirectly buying government debt via bond traders and the bond traders make a nice commission, this allows the DMO and BoE to circumnavigate the Maastricht treaty that outlaws central banks directly buying government debt. Everyones appy.

If I recall correctly this part of the treaty concerned EMU and would come under the title of "UK opt out".

[interestrateripoff]

It was my understanding the DMO sold government debt "to the market". Then the BoE created new money to buy the government debt from "the market" via reverse auctions. The market bought the debt from the DMO and sold it to the BoE at a profit, nice work if you can get it. In summary the BoE are indirectly buying government debt via bond traders and the bond traders make a nice commission, this allows the DMO and BoE to circumnavigate the Maastricht treaty that outlaws central banks directly buying government debt. Everyones appy.

Sounds a bit like the rules for MP expenses.

These people need lynching.

[Bloo Loo]

look, stop worrying...printing is what they did in Zimbabwe.

its easy, just write a Bank of Zim Cheque for any amount and the bank will clear it.

Thats just silly.

So, from the people that brought you the SIV, the off balance sheet conduits and financial assets based on financial assets based on nothing at all, comes the Quantitative ease. its not anything like printing, first off, its experimental...that means, in laymans terms, its never been done before.. second, its got a complicated formula and advanced mathematical modelling behind it, and third, its got a really technical and almost feasable name.

so leave it out with the fear mongering....there are real terrorists out there wanting to tear down our civilisation with bleach and weedol.

[interestrateripoff]

look, stop worrying...printing is what they did in Zimbabwe.

And just look at Zimbabwe now cholera free, jobs for all, mass influx of workers from South Africa, farms producing record amounts of food and a leader who respects opposition politicians.

We really couldn't ask for a better role model and all you hear on here is people panicking saying everything is going to collapse.

I mean do you think this country is led by a delusional idiot?

We have highly educated people running the show and doing exactly what is needed because it's the right thing to do.

[loginandtonic]

It was my understanding the DMO sold government debt "to the market". Then the BoE created new money to buy the government debt from "the market" via reverse auctions. The market bought the debt from the DMO and sold it to the BoE at a profit, nice work if you can get it. In summary the BoE are indirectly buying government debt via bond traders and the bond traders make a nice commission, this allows the DMO and BoE to circumnavigate the Maastricht treaty that outlaws central banks directly buying government debt. Everyones appy.

thats alright then, for a minute i thought they were paying their debts with their own counterfeited money

[sikejsudjek]

While we keep up the money printing delusion we can continue to spend on pointless crap like wars, id cards and smart meters... what could possibly go wrong ?

[Concrete Jungle]

thats alright then, for a minute i thought they were paying their debts with their own counterfeited money

They are doing, but the difference is their "counterfeit money" is legal.

[FreeTrader]

If I recall correctly this part of the treaty concerned EMU and would come under the title of "UK opt out".

Don't think so huw.

The BoE is a member of the European System of Central Banks, and they have their own statute that covers this:

Article 21: Operations with public entities

21.1. In accordance with Article 101 of this Treaty, overdrafts or any other type of credit facility with the ECB or with the

national central banks in favour of Community institutions or bodies, central governments, regional, local or other public

authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the

purchase directly from them by the ECB or national central banks of debt instruments.

http://www.ecb.eu/ecb/legal/pdf/en_statute_2.pdf

[the_austrian]

If not for the BOE, would the auction have failed?

[aliveandkicking]

Don't think so huw.

The BoE is a member of the European System of Central Banks, and they have their own statute that covers this:

Article 21: Operations with public entities

21.1. In accordance with Article 101 of this Treaty, overdrafts or any other type of credit facility with the ECB or with the

national central banks in favour of Community institutions or bodies, central governments, regional, local or other public

authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the

purchase directly from them by the ECB or national central banks of debt instruments.

http://www.ecb.eu/ecb/legal/pdf/en_statute_2.pdf

FreeTrader

If the ECB are providing unlimited liquidity to the Euro area banks in exchange for collateral does it really matter any more? Who actually is going to allow any kind of meaningful challenge to whatever any government wants to do right now? If the UK wants to stimulate their own economy i am sure all of the other member states are delighted by that.

If not for the BOE, would the auction have failed?

Last year Bond traders made massive profits. Volatility and swings in sentiment are their bread and butter i would guess.

Meanwhile the BOE cant possibly buy all of the UK bonds that currently exist in the Universe as a plan that will do anything other than create hyperinflation. What it can do is stand behind the product and suggest that there is less reason to feel you will not get your money back from trading in UK bonds while also signalling it is there as buyer of last resort to ensure your otherwise valueable UK government or corporate bond has a market if you wish to sell now or even if you wish to create new bonds to raise new money.

At the end of the day if the market perceives this has some kind of Zimbabwe like move to higher inflation then that is what the BOE wants. It wants people to move out of cash into assets. It wants a buying frenzy. It does not want a buyers strike as buyers wait for prices to fall.

It is not my script by the way but you can see the way they are writing it.

Edited May 22, 2009 by aliveandkicking

[Bloo Loo]

FreeTrader

If the ECB are providing unlimited liquidity to the Euro area banks in exchange for collateral does it really matter any more? Who actually is going to allow any kind of meaningful challenge to whatever any government wants to do right now? If the UK wants to stimulate their own economy i am sure all of the other member states are delighted by that.

Last year Bond traders made massive profits. Volatility and swings in sentiment are their bread and butter i would guess.

Meanwhile the BOE cant possibly buy all of the UK bonds that currently exist in the Universe as a plan that will do anything other than create hyperinflation. What it can do is stand behind the product and suggest that there is less reason to feel you will not get your money back from trading in UK bonds while also signalling it is there as buyer of last resort to ensure your otherwise valueable UK government or corporate bond has a market if you wish to sell now or even if you wish to create new bonds to raise new money.

At the end of the day if the market perceives this has some kind of Zimbabwe like move to higher inflation then that is what the BOE wants. It wants people to move out of cash into assets. It wants a buying frenzy. It does not want a buyers strike as buyers wait for prices to fall.

It is not my script by the way but you can see the way they are writing it.

WHy out of cash into assets...if everybody moves into assets, where will all the lending take place....surely that is the OPPOSITE of what they want.

[Matt Bear]

It seems sensible to me given they are the government and they dont want deflation. Also hard to believe they are going to fail in the objective either.

Therein lies the problem as I see it. Now they have started down the QE route, it cannot be allowed to fail. They will have to keep printing if there's any hint of deflation. If that happens then at some time there will come a tipping point...

[babesagainstmachines]

You seem to be living under the mistaken assuption that rules are made for everyone to follow.

[aliveandkicking]

WHy out of cash into assets...if everybody moves into assets, where will all the lending take place....surely that is the OPPOSITE of what they want.

If you spend cash somebody else has cash. If they want to spend cash quickly then cash is now circulating rapidly in the economy as a force that is supporting asset prices because people dont want to hold cash personally while it devalues but instead want assets that are rising in value. At the smallest part of this chain is an old age pensioner who buys two jars of jam and two packets of sugar as a way of saving in assets or commodities.

Alternatively money sitting in savings accounts with little spending and little lending is deflationary

[Bloo Loo]

If you spend cash somebody else has cash. If they want to spend cash quickly then cash is now circulating rapidly in the economy as a force that is supporting asset prices because people dont want to hold cash personally while it devalues but instead want assets that are rising in value. At the smallest part of this chain is an old age pensioner who buys two jars of jam and two packets of sugar as a way of saving in assets or commodities.

Alternatively money sitting in savings accounts with little spending and little lending is deflationary

money doesnt just sit in a savings account though...does it!

[Blue Peter]

money doesnt just sit in a savings account though...does it!

Indeed, which I think is what this blog post is getting at:

QE on Thames

Finally, we leave you with a little ridiculous diagram that is supposed to clarify how QE is supposed to work and do it’s job. We won’t go into detail on the many flaws in this thought diagram, we leave it up to you dear reader to make your own long list. All we advice for you to solve is puzzle is to ask yourself the following questions. At each arrow in the diagram, ask yourself “who is the intermediary and how do they benefit? Then, determine the mechanism through which it’s supposed to work (ie: direct purchase, etc). And finally, ask yourself, what could go wrong with the mechanism. These three questions should be enough to reveal this diagram in all its flawed, misleading, naïve and ill-defined ignominy.

If people are buying gilts from the DMO and selling gilts back to the BoE (not necessarily the same gilts), how does this help money get into the "real economy", apart from the bit that the traders made on the arbitrage between the bought and sold gilts?

Peter.

[FreeTrader]

FreeTrader

If the ECB are providing unlimited liquidity to the Euro area banks in exchange for collateral does it really matter any more? Who actually is going to allow any kind of meaningful challenge to whatever any government wants to do right now? If the UK wants to stimulate their own economy i am sure all of the other member states are delighted by that.

I hear what you're saying but with those statutes in place, if I were Mervyn King or any other official at the BoE and the Government told me to start buying gilts directly I'd tell them to go take a flying hike.

I don't see it as a moot technical point – it's a real barrier to direct central bank funding of public debt.

[aliveandkicking]

I hear what you're saying but with those statutes in place, if I were Mervyn King or any other official at the BoE and the Government told me to start buying gilts directly I'd tell them to go take a flying hike.

I don't see it as a moot technical point – it's a real barrier to direct central bank funding of public debt.

The governors job is to ensure there is sufficient money in the economy. Whatever stupidity got us this far i think we can argue there is insufficient money in the economy.

So whats a governor to do? The asset purchase program using 'electronic money' enables people holding debt assets to have spendable money. Further it enables companies who cannot raise cash from banks to be able to issue bonds which will enable them to finance whatever operations they need to get thru this crisis without collapsing the UK economy and since the UK economy is such a big chunk of the World economy by implication since the number one economy is already having its own problems, these actions are helping to 'save the world as we know it'

Of course many here argue the world is not worth saving. I am 53 so i no longer agree with that kind of sentiment which i would have shared 25 years ago.

Anyway at the end of the day a CB cannot directly fund their own governments debt. All they can do is allow jam today to get thru todays hunger in the expectation that tommorrows cheaper groceries will be in the larder.

Probably the current government will have to go and then a granny with a handbag and a shopping trolley will be wheeled in to sort things out and show the boys how to manage the household expenses.

Edited May 22, 2009 by aliveandkicking

[aliveandkicking]

money doesnt just sit in a savings account though...does it!

It does if the banks are not lending the money back out again and are delevering to accumulate capital reserves to deal with mounting loan losses.

[aliveandkicking]

Indeed, which I think is what this blog post is getting at:

QE on Thames

If people are buying gilts from the DMO and selling gilts back to the BoE (not necessarily the same gilts), how does this help money get into the "real economy", apart from the bit that the traders made on the arbitrage between the bought and sold gilts?

Peter.

If it were only working like you are saying, and it could be, then the BOE is handing the government 75B over the next year to spend to stimulate the economy in amounts determined by the monetary policy committee to prevent deflation.

At the end of the day Debt is in nominal numerical amounts of money at todays money value. As each day goes by, if you have inflation debt devalues if incomes rise.

The BOE is also spending 50B to support corporate debt issuance in amounts determined by the monetary policy committee in consultation with the team of analysts who travel around the country asking companies if they can borrow money and what conditions are like in their markets. I get the impression these companies are saying please please help us we are dying out here.

QE seems to make sense to me so far.